Hard yards before economic spring – WestpacNZ

Economic slowdown continues

Hard yards before economic spring – WestpacNZ

Westpac NZ's latest Economic Overview, titled “Doing the hard yards”, paints a sobering picture for the New Zealand economy.

“Households and businesses will feel uncomfortable this year,” said Kelly Eckhold, Westpac NZ chief economist.

“Growth is not at disastrous levels but is weak, and the labour market will do a greater share of the required adjustment. The government will also begin fiscal consolidation which will aid economic adjustment. It’s going to be a long grind to fiscal balance.”

Economic growth and adjustment

New Zealand’s economic growth has stalled, projecting only a 0.7% increase for 2024, with unemployment expected to rise to 5.4% by mid-2025.

Growth is curbed by tight financial conditions and reduced demand from key trading partners, despite ongoing support from the tourism sector and strong net migration.

The economy is transitioning from pandemic-induced growth to a more sustainable balance as demand cools.

Inflation and interest rate dynamics

Despite the global economy showing weak signs of recovery with some promising “green shoots,” the domestic challenges are compounded by persistent inflation pressures.

“Past interest rate increases are now having their peak effect, which means we all can look forward to better inflation outcomes this year and next,” Eckhold said.

However, persistent domestic price pressures mean that reductions in the OCR are not expected until early 2025. It is anticipated that the eventual easing of borrowing costs will enable a recovery in economic growth starting from 2025.

Local price pressures continue to influence policy decisions, suggesting a cautious approach to any significant OCR cuts.

Labour market adjustments and unemployment concerns

The labour market is expected to weaken further, with unemployment rising amidst sluggish economic growth. Modest employment growth is anticipated, but rapid net migration and a softening economy could complicate the labour market dynamics. Wage growth is expected to gradually moderate over the next year, influenced by increasing slack in the job market and easing cost-of-living pressures.

“The evolution of wages, and business margins, will be critical in determining inflation and interest rates,” Eckhold said.

Financial strains and consumer spending

High inflation, rising borrowing costs, and a cooling labour market are expected to keep household spending subdued throughout 2024. While income tax reductions may boost spending later in the year, the average mortgage rate increase poses ongoing challenges.

“Household debt is likely to remain manageable, even with the labour market weakening,” Eckhold said. “Businesses across the country have highlighted increasingly tough trading conditions, including pressures on margins.”


House prices are projected to rise by 5.8% in 2024 and 6.7% in 2025, despite being dampened by high interest rates and below-trend growth. Strong drivers such as population growth, rising rental demand, and increasing investor interest—amidst an estimated need for 125,000 more houses over the next five years—will support prices.

“Prices are being restrained by high interest rates and below trend growth but supported by strong population growth and associated rental demand,” Eckhold said.

Construction and development

Tougher financial conditions are impacting new development, with housing consent numbers down 25% over the past year.

Both residential and commercial construction sectors face challenges due to economic slowdown, affecting retail space development and potentially delaying infrastructure projects due to cost pressures, Westpac reported.

Government fiscal strategy and debt management

The government is expected to begin slow fiscal consolidation, with tax cuts and expenditure reductions on the horizon. However, mounting spending pressures and a potentially lower nominal tax base than forecasted mean that achieving the government's debt targets will require more stringent fiscal policies.

“The fiscal outlook is challenging with a prolonged tight fiscal stance required to return the books to surplus at a time when rapid population growth is lifting the demand for services,” Eckhold said.

“Our forecasts imply a much larger borrowing programme than depicted in the HYEFU. A lower nominal tax base means lower tax revenues and strong population growth will make it hard for the government to constrain spending beyond the next couple of years.”

Inflation and monetary policy adjustment

The inflation outlook is expected to gradually improve, although achieving a 2% rate will remain challenging. RBNZ is likely to accept inflation slightly above 2% as sufficiently close, leading Westpac to adjust its medium-term inflation expectations.

Eckhold said that while policy easing is anticipated in early 2025, persistent domestic inflation reduces the likelihood of significant OCR reductions next year.

Although policy tightening is not out of the question, it seems unlikely given the current weak growth. The RBNZ is more likely to moderate the pace of OCR cuts in 2025, tolerating slightly higher inflation for a more extended period.

“Spring will come – but we need to do the hard yards through winter first,” Eckhold said.

Find more on Westpac NZ's economic insights on the bank’s website.

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